Who Are You, and What Is Your End Game?

“Tell me who your heroes are and I'll tell you how you'll turn out to be.” - Warren Buffett

(Side note: I ain't a huge fan of the way Buffett invest, particularly of the version that runs Berkshire Hathaway. It is a large entity, employed ways and means which aren't accessible by the small guy. But I like him enough as a person and love reading about what he does during his Buffett Partnership years)

I met up with a good friend of mine recently and pondered about what our end game should be. I do have a vague idea: when I am much older and alone, I would be living within a small residence in the company of a couple of cats. 

This is a picture generated by the wonder that is Dall-E:

Pardon the number of cats. Not sure why Dall-E generated only one. There would be a British short hair and the fat cat that lives at the void deck of my block.

Most people desire wealth-- the question is, "Why?" and not "How much?" 

Money is useless per se if it could not be used to buy something. So ultimately, it is the something that we desire. It could be a car, a kind of life, tangible or not. Munger wants freedom-- the freedom from shackles of having to answer to someone.

 

So why the quote at the beginning of the post? I find that a person's idol tend to be quite telling of what that somebody is, or desire to be. 

That, is literally the result of Dall-E when I enter the terms "Walter Schloss picking up cigar butts"

Unless you are a value investing nut, the name Walter Schloss would mean nothing to you. His returns are consistently better than the market's, and his investment approach is simple enough for a person like myself. He has no desire to serve the rich and the famous, or most of all, himself. 

He has never gone to college; I had a offshore learning liberal arts degree which I never put into use. He believe in thrift and have no worldly desires that I could think of-- I think I have been so for my whole life (which explains why I wasn't that driven in many aspects of life). My friend told me that I am like a blank canvas.

It wasn't because I dislike nice things. I just don't feel the joy (rapture?) of using them. I conclude that the end game is to find joy, from something or somewhere. What is the most beautiful thing in the world?

***

When I was starting out, I suffered a hefty loss speculating in small pharma stock. Falling down repeatedly, I told myself that I need to change. I need a system that was not only simple, but could work even if I am marooned on an island. I could think independently and this system could work reliably. 

On reflection, I think it is fair that I probably only half way there.

My wish in investing is that I could look at major market corrections calmly and take advantage.

My memory have not been great but I do remember 2020-22 pretty clearly. The biggest winners came from health, tech and the company everyone knows-- Tesla. Disruption was such a buzz word. Everyone around me wants to talk about those companies. Dollar cost averaging was encouraged for big tech and Tesla. 

I wasn't a fan because of a few reasons:
a) Back of the envelope numbers indicate pretty high multiples.

b) They are huge companies and there isn't much runway to grow (law of large numbers)

c) Competition will eventually come into the picture

[A] is largely about market reversion to mean as well as appetite/mercy. The mood of the market decides how much multiple a company deserves. The same company that have a 50x multiple could be sold down to a 30x multiple when growth slowed, or stalled. That is already a 40% loss btw! 

However, if they could maintain their ROE consistently, the market will usually priced them many folds in the far future. But the big companies have the size disadvantage.

With [B], the David (which is you) will find yourself in the company of Goliaths, which are institutions and big players. They have a tremendous advantage over you as an investor. They might be more in tune with the industry, intimate access to insiders, news; clearer understanding of the interlinking macro-economics data and its interpretations... the list goes on.

With smaller companies, the big players are just not interested.

[C] comes to everyone and erodes return over time, unless you have a competitive advantage. Few companies possesses that. As of writing, Tesla had to cut prices in China. That says something.

Generally, the kind of person that you are, affect the kind of beliefs you have, and the way you would invest. I am deadly boring and pessimistic-realist. I know my approach would bore people to death, but I know I can lose very little (most of the time), because I don't swing for the fences.

I have associates that seeks a more directly-rewarding approach such as  looking for catalysts or likely improvement in earnings. Another approach is to look at macro economic and anticipate which industries would enjoy tailwinds. I have doubts that these approaches work very well in the long term, but I know one thing very well-- and that these approaches are too tough for me and I should avoid them.

In short, it isn't that these approaches don't work. They are too tough for me.

I have to accept that I could not enjoy the fruits that these people could have, but I avoid the pains as well. 

My simpler approach will work fine in most years. There won't be a crowd cheering me on when I finish the race. Neither is anyone going to pat my back, nor do I have to call people dumb or donkeys to constantly validate myself (or derive joy from putting others down?) and feel good. 

***

If investing is a cross country cycling race, and you knew that you do not have the kind of physique to go fast for a long time, or couldn't climb over obstructing mountains to save time, then you have to use other tactics. 

Perhaps you could sleep less and cycle at a moderate pace. 

Or perhaps you are a tough cookie-- you could choose to pedal on even during the foul weather, unlike everyone else who is seeking shelter.

If you are the only person left delivering food in this weather, I guarantee that you will not run out of orders.

Investing is like that. You don't have to act in a manner that disadvantages you. Don't play games you can't play.

Be realistic of the expected returns with the kind of strategy you employed. You could 10x a stock in 1 year, doing something really stupid but you could lose the same (or more!) with the same approach.

I knew long ago that I could never get rich fast.  I couldn't bring myself to take on risky paths like leveraging, buying tons of call options. I would love to get rich fast.

And it is very frustrating because I could see my parents ageing day by day and by the day I "finish" this race, they might no longer be around. I started too late.

And I do feel like I am a failure for that. For the young ones reading, you have my envy. You have a lot of options. Start early, fall down enough times, and you will learn to balance yourself very well.

Thank you for reading and I wish you good health.

Dec 2022 Portfolio and EOY Summary

As of 18-Dec (Sunday),

S&P 500 Index Fund:  -13.77%->  -17.36%

Hong Kong Tracker Fund: -17.22% -> -12.31%

Straits Times Index Fund: 8.24% -> 7.36%

My portfolio: -18.17% -> -12.17%

Transactions:

Further increase in Singapore Saving Bonds and Singapore T-bills. As explained earlier, these are for my mum. I have been laddering the investment-- for the uninitiated, it means to break up the total sum available for investment, instead of investing the total in 1 lump sum.

An example: assuming you have $100,000 to invest in t-bills. If you do laddering, that would mean:

Invest $20000 in Dec

Invest $20000 in Jan

Invest $20000 in Feb

Invest $20000 in Mar

Invest $20000 in April

The first batch that was invested in Dec would be available by end of May.

Given the popularity of these instruments, getting the full sum of $100,000 allocated is not going to be a sure thing. Laddering it this way also have advantages in liquidity-- in the event that we need money (I hope we will never end up in this scenario), that is 1 month of wait instead of 6.

End of Year Commentary

After a very kind two years of portfolio returns, this year's performance is the worst ever in my short history of dabbling in the markets.

The 80% total return lead over the current runner up, the S&P 500, has been cut to just 50%. Stock.cafe tells me that my XIRR is about 18%, which is great for someone as simple-minded as myself. However, it is scant consolation since this year is not just a down year per se, but also the year where the greatest amount of capital has been injected. So I actually endured a ton of unrealised losses. It was very humbling.

A discussion of my current holdings:

Like most people who invest in a value-oriented approach, none of my holdings were bought into because of good news. I will proceed to run down the list of companies in my holdings and provide the rationale.

My list of holdings look like a record of losers. My affinity for the disadvantaged started almost 30 years ago. Back then in my young teens, I was an avid street basketball player. Each day looked like this: once there are enough players are on the court, the "captains" will shoot free throws, and the winner will get to pick first.

I often pick the physically-inferior, the unpopular players. Because deep down inside, I know how it feels like to be nobody's choice. 

When it comes to picking stocks, I think I am attracted to problems because nobody likes them. But they have a lot of potential to come back... as long as they are not too badly priced. I used to avoid betting on companies laden with debt. I don't know when it started (probably with Centurion), but if I ever survive this year (it is really a very, very bad year), perhaps I will never be this haughty again.

To put it bluntly, I am attracted to problems just like flies are attracted to shit. I guess. Heh...

***

OKP: The biggest slice of the lot. I started buying OKP since the accident. It was at least 2018. Unfortunately this idea had not come to fruition. The last transaction was Nov this year-- I still have faith that this company is cheap and awaiting optimistically that the outcome of the arbitration would be favourable.

Alibaba: Everyone knows why.

Central China Real Estate and Central China Management (00832 and 09982 respectively): 9982 is an asset light spin off of 0832 and hopefully the cash/share is real. 00832 is deeply in debt and had a lot of bad news.

It took a lot of heart to hold on to both stocks. They did not receive much uplifting as compared to their sister stock, 9983, which deals with property management instead of property project management.

I don't know if I ever want to be in such a position again. 00832 has recovered significantly-- part of me which to liquidate after such a trying period. Part of me hoped for profits to justify all the pain and suffering I went through. 

Investing is very hard.

Centurion: Prices were brought down to earth badly due to COVID. Unfortunately, even without the COVID overhang today, the value is still somewhat being suppressed by management. Based on its previous earnings power, it is cheap. During 2020-21, I could see that the dormitory business is irreplaceable as there is no alternative along with the NIMBY mentality, especially in a land-scarce country like ours. 

YangZiJiang Finance: Another battered down stock. After reading the prospectus, I believe it is a case where by there will be defaults in its debt investment portfolio, requiring a huge amt of write-offs. It is a case of market overcorrecting the stock. However, I am not a fan of the chairman. YZJ Finance would rise and fall with CCRE and CCMGT unfortunately. 

I have strange affection for beaten down stocks, especially when they are spin-offs.

Fu Shou Yuan: This was another stock beaten down by COVID. It enjoyed a revival due to (I am inclined to believe) loosening of COVID-controls. I shall not say much except that the company deals with the after-life management. ROE is in the young teens. Such stocks do okay over long term.

Lendlease REIT: This was a COVID-recovery play; it had the least amount of leverage amount the retail REITS. I didnt not invest a great deal initially due to its customer concentration risk (2 main properties only back then). As time goes, the REIT decided to buy up JEM and also did private placements and a rights offering. After listening to the CEO, I believe that the REIT is in good hands. The REIT is also small and has room to grow.... unlike most of the giant REITS in Singapore.

Nanyang Holdings: Given how illiquid it is, I did not acquire a great deal of stock. This is one of my many holdings that went down >25%. The company have also subscribe to its full allocation of Shanghai Commercial and Savings Bank. It wasn't a popular decision-- about 1/3 of its shareholders voted against it.

To be honest, I have no idea how this company will pan out, i.e. what catalyst would there be? The oldest, first-generation manager had left this world. I doubt the successor will act differently. But there is a respectable price to value gap difference.

Perhaps this is why I like companies with problems. Nanyang Holdings has no known problems. Many others in this list does. The resolution of problems acts as the catalyst, and unfortunately Nanyang has none..

Activision: Arbitrage play.

Didi: Wrote put options and it went terrible wrong. Wonderful lesson.

The rest of the positions are too small to matter.

***

As 2022 comes to an end, I wish everyone reading this the same things that I prayed for every day: that my parents would be treated kindly by the powers up there. 

November 2022 Portfolio Update

 As of end of trading 29-Nov-2022,

S&P 500 Index Fund: -15.43% -> -13.77%

Hong Kong Tracker Fund: -29.32% -> -17.22% (huge improvement in 1 month)

Straits Times Index Fund: 0.92%  -> 8.24% (such optimism had nearly gone unnoticed)

My portfolio: -21.48% -> -18.17% (not much improvement)

Transactions:

1) Increase in T-Bills purchase for my mum

2) Modest increase in OKP

3) Modest increase in Alibaba (9988).

Commentary:

Portfolio lagged against indices this month, particularly Hong Kong. This is because much of the holdings are in Central China holdings-- which did not receive as much optimistic buy-ins as compared to its bigger, more well-known peers. I believe the boost in prices came from buy-ins from Chinese investors, and Central China positions are taken off stock-connect some time back.

I am more concern with my family life, as my mum suffered a huge episode of high blood sugar, and had to be sent to the hospital. She was warded in high dependency ward and subsequently in a normal ward. I spent the first day largely sleepless, as the hospital called in every couple of hours to report status; a blood test here, an urgent procedure next, and so on.

Now mum is safely back home. But life would never be the same again. Before this, we were much more careless with high glucose readings. Dosage has been raised, but readings remain stubbornly high. Luckily we are visiting the diabetes doctor next week.

CCRE liabilites: A mountain to climb

Daily falls of 8% and more is common with this stock.

Central China Real Estate (CCRE) is one of my sizable investments. It is one of those "high risk, high reward" bets, and probably the riskiest. Here is a note to myself, perhaps as a reminder to never take such bets again.

It is well known that the company balance sheet is in great trouble. Its share price currently reflect a price to book of... 7 cents to 1 dollar of asset.

Looking at their interim report in late Sep 2022, the numbers look equally ugly.

Short Term Debt,
...of bank loans and other loans, 5761.86m
...of senior notes, 5354.493m

Long Term Debt,
...of bank loans 3551.778m
...of senior notes, 10972.022m

=================

Payables,
...51622.988m (!!!!), of which 40B of it does not involve associates or entities controlled by the owner.

==================

Assets
... stated as Inventories, of which are Properties, under development 88075.223m (could this figure be trusted, since property prices are falling?)
... of properties already developed: 6554.351m

Cash: 3622.412m
Restricted bank deposits: 2885.414
Receivables: 5548.762

==================

as of now, the only good news is very publicly known: Henan Tongshenzhiye would be issued 29.01% of the shares float for a convertible bond, yielding 5% at 708m HKD. IMO, this is not a large sum and conditions laid out are not publicly stated.

If we were to trust the asset value, it sums up to a total of 106686m, or 106.7B. 
The liabilities (including the monstrous payables), total up to 77263m or 77.263B.

As such, it is clear that the market believes the property sales will suffer for a long time, and/or the value of the properties (be it developed or still developing) are overstated.

I am cautiously watching for news and believe that short of a miracle, it will be a long, winter-like wait till the company emerges from the weight of its troubles. 

一年一年过。

The Resumption of Best World

Best World resumed trading yesterday. Prior to that, it had conducted two "equal access buyback offers," both at arguably very low prices of 1.36$. I wrote an opinion after the first exercise was announced. I do think that the price was opportunistic.

So on Monday, I surmise that the patient and opportunistic bunch would bid up the prices. They did. From the open price of 1.47 (an 8% over the buyback price), to a day high of 1.87 (up 37.5%). The market calmed down and ended at 1.82.

Today, on the second day of trading, saw sell down till 1.57, representing a decline of 13.7%. It was pretty volatile, and ended with a doji candlestick pattern of 1.64. Volume on both days does not differ significantly.

At 1.64$ a share, and 440.121093 million shares (based on the latest announcement of share buy back conducted today), this means Best World is priced as follows, based on the 3Q filings:

Market Capitalization: 721.79m

Cash and Eq: 356.918m

Inventory: 77.352m

Receivables: 20.027m

Total Liabilites: 209.6m

Should we discount the value of inventories and receivables by 50% each, without discounting any for cash and eq, the quick and dirty net asset is of 198.9m, or round off to about 200m.

This means that a shareholder is paying 521.8m dollars in effect for a company that had been earning 54m (in 2017) to 140-ish million (2018, 2020, and 2021). It earned 70m in 2019. Based on any year, none of them look too demanding. 3Q filings does register decline in cash flows on a y-o-y basis.

The biggest contributor to its coffers appear to be still from China. So the worsening numbers could reasonably be attributed to the country's COVID control policies.

If one would had know that trading would resume in a matter of months, no reasonable shareholder would have participated in the equal access offer. None of the executive directors sold-- that would be expected. Those who sold had their money stuck in there for way too long.

What caught my eye is that board members, particularly the non-exec directors, as well as senior management largely remained in the company.

Purchasing Best World shares at the moment is difficult on a couple of counts: first, one would be aware of the possibility that the company would run foul of regulations/laws. Since board membership remains largely the same, I think the probability of it is low.

The second reason is likely price anchoring given how the stock surged on day 1. Maybe it would be easier to look at it from a value point of view; if there is still a huge gap between value and price, a 30% surge on a day might mean little.

So my back of the envelope math tells me:
Since the "net" asset is about 200m, and cash flow is about 100-140m in recent times, a no-growth multiple of 7-8, based on an assumption that it would earn about 90m yearly, means this company is worth about 200m + (630m to 720m) which round off to~ 830m to 920m. These are very "safe" and conservative numbers, indicating a margin of safety of only 15-27%.

The growth investor would baulk at these numbers and rightly so. But this is the stock market, and the market is never kind to companies that don't grow, no matter how much free cash they threw off yearly. 

The market and media, laughingly, would only claim that such a company is too cheap when they attempt to go private. Otherwise by and large they are believers of efficient markets.

If you would believe that the company could earn about 120m and ascribe a multiple of 10, that would mean the company is worth 1400m, an upside of about 100%! Valuation is very personal.

Given what happen to my portfolio in 2022, I think it is fine to be too conservative. 

As of writing, I do not have any positions in Best World.

Oct 2022 Portfolio Update

As of end of trading 30-Sep-2022,

S&P 500 Index Fund: -19.23% -> -15.43%

Hong Kong Tracker Fund: -19.48% -> -29.32%

Straits Times Index Fund: 3.17% -> 0.92% 

My portfolio: -15.13% -> -21.48%

The Hang Seng Index was a train wreck this week. On the first trading day after unveiling the Politburo,  it feel just about 6%, recover slightly during the middle of the week, only to fall 3% on Friday, with the tech index enduring a worse fate.

YTD, HSI's red ink exceed 30% with ease. If you had bought the Hang Seng index fund in 2016, you will still be losing money today.

My portfolio, which consist of almost 40% in Hong Kong stocks, is not spared from the torrid, horrifying HSI sell downs.

As for my own portfolio, -6% is actually way worse than it look, because of a huge amount of purchase in T-Bills this month. Without it, I am looking at likely 10% down this month.

Notable transactions:
1) Very sizable amount of capital into Singapore T-Bills, as parents are looking to invest money kept in fixed deposits yielding less than 1%. At their age, it is not prudent to buy stocks.

2) During this week alone, I picked up

a) Yangzijiang Finance, a fair amount of it, actually. It propped to my top 5 posiitons.

b) Alibaba

c) Central China Real Estate

3) Modest amount in Nanyang Holdings (increased liquidity and selldown in prices). It is extremely difficult to purchase this 

4) Liquidate Embecta to purchase some (3). Only to see Embecta go up by more than 10%....

5) Modest amount in Central China Management.

***

With unprecedented market volatility in Hong Kong markets, it is very tempting to keep buying the Singapore Treasury Bills. With an attractive (if you adopt a short term view and ignore inflation, in which both attitudes are harmful in the long run) interest rate, this seems to be what majority is doing.

But isn't investing all about not following the crowd and doing what felt painful? This fog of war is why investing is so difficult. You can't say that following the crowd is wrong; one could say that it is always the darkest before it is pitch-black. 

What feels like very bad bets presently?

REITs comes to mind. With risk free interest rate going up, REITS, which ironically are suppose to be inflation-fighting instruments, are now being sold down because of interest costs. With years of zero-to-low interest environment, one could be forgiven to think this way. There will no doubt be opportunities in buying some sold down REITs. 

I did consider reducing positions in Lendlease but the WALE and interest cover, does make it suitable for long-term holding. It was no doubt very depressing to see it go below the price where rights are issued (which I had subscribed). But if you had read your intelligent investor, you are a little better equipped (in the mind) to deal with broad market selldowns. 

Unfortunately, nothing could prepare you when the only stocks selling down are the ones you hold, and the market is enjoying a massive rally. I think that hurts a lot more.

Sep 2022 Portfolio Update

As of end of trading 30-Sep-2022,

S&P 500 Index Fund: -12.44%-> -19.23% (a drop of 6.79%)

Hong Kong Tracker Fund: -9.9% -> -19.48% (drop of 9.58%!!)

Straits Times Index Fund: 6.61% -> 3.17% (drop of merely 3.44)

My portfolio: -9.12% -> -15.13% (drop of 6.01%)

Transactions made:

Increase of modest amount of Central China Real Estate due to reducing prices. Unfortunately the market price of CCRE fell from my purchase price of 0.4 HKD to currently 0.315. The selldown was relentless.

Speculative purchase of token amounts of Fraser Hospitality Trust. I am currently down about 10% from this position. It was stupid.

Average down on Fushouyuan Holdings at 4.46. The price is at multi-year low. If earnings power were to hold, the cash yield is approximately 7%. I should have started my purchase at this price tbh.

Purchase in a significant number of T-Bills (BS22119T ) for my parents. These are for 6 months and it is said that next month's Singapore Saving Bonds would be roughly this yield.

Commentary

Life have not been treating my family well this month. 

As soon as she was cleared of the suspect tumor in the pancreas, my mum have developed new a migraine which she could hear sounds when the ache pulses. I deeply hope this is temporarily.

As the doctor probed about if there is anything weighing on her mind, my mum started to teared in the room... I was hinted to leave the room so that she could open up to the doctor. I guess my mum opened up to her freely and the visit ended after another 20 minutes. The doctor merely mention that we need to monitor her headache and to spend more time with her as a family.

It isn't a sight that I could take very well... I have to admit that I am one of the most boring and passive person you could meet. I am poor at consoling or comforting someone... basically I am poor at dealing with human beings.

I digressed... let me revert to the topic of investing.

For someone who bothers with absolute performance, this isn't a great time. However, I lean towards the relative side-- if the indices were to do badly, my portfolio is not going to go unscathed. No ship could stay still in a storm.

All we could do is the wait patiently.

August 2022 Portfolio Update

As of 30-August-2022,

S&P 500 Index Fund: -16.2% -> -12.44%

Hong Kong Tracker Fund: -5.65% -> -9.9%

Straits Times Index Fund: 1.4%-> 6.61%

My portfolio: -5.49% -> -9.12%

It is not a great feeling to see your portfolio sink when indices rises. My performance this year should be the worst ever since I started recording my investments in Stockscafe.

Notable Transactions:

1) Complete divestment of IGG

IGG was disposed for two reasons, (a) possible turnaround in the Central China story and (b) zero insider buying in recent times, (c) perhaps, lack of confidence in the game in question. The game in question is Yeager and it might turn out to be a big hit, and I might truly regret it, since IGG is considered fairly cheap.

2) Modest increase in Central China Management ("CCMGT")

3) Modest increase in Central China Real Estate ("CCRE")

I am utilizing my funds for this two ideas as I deem them risky. CCMGT is very cheap at 0.710 provided the cash in the books is real-- it is almost as much as the market capitalization itself. CCMGT has about 2B Renminbi in cash, and the market cap was 2.3B HKD.

Both CCRE and CCMGT are high risk bets given the debt on the former's books. This will be a long, painful holding period, and if I am right, I would be well rewarded and otherwise, I would lose as much as 15% of my portfolio. On a cost basis, they would amount to a close #2, very close to what OKP would have cost (26%).

This is a very risky investment.

4) Purchase of SSB September for my parents

2.6% is not too bad.

5) Modest increase in Nanyang Holdings

Unfortunately, Nanyang Holdings is one of the three companies (besides CCMGT, CCRE) to report a profit warning.. so with lower prices, comes lower risk.

6) Increase in Yangzijiang Finance.

Modestly increasing YF8 due to lowering prices and aggressive company buybacks.

****

These are very dark days. My mum is having a medical review on her pancrea MRI in 2 days, and only yesterday, we were informed that my maternal uncle have a very grim medical condition. It is not a great feeling when you return home from work, and your mum ask "how are the stocks doing?"

To that, I could only utter, "these are times where you have to endure."

July 2022 Portfolio Update

As of 14-July-2022:

S&P 500 Index Fund: -19.97% -> -16.2%

Hong Kong Tracker Fund: -6.18% -> -5.65%

Straits Times Index Fund: 0.53% -> 1.4%

My portfolio: -2.63% -> -5.49% 

Notable Transactions:

-Complete divestment of TTJ due to forceful acquisition of shares. I have tendered all but a token amount of them (in my SCB trading account). More on this in a latter section.

-Slight increase in Embecta.

-Increase in YZJ Finance in CPF due to the impending liquidation of TTJ

General Commentary

It does feel like my investments are largely inline with market performance. Most market participants would tell you that the first half of 2022 is horrid. 

Superficially, my portfolio reported a 40% gain at the end of 2021. But really...the nightmare started in 2021 itself, right after the start of 2nd half 2021. 

This is the trailing 12 month performance as captured by Stocks.Cafe

It should be much lower than 33%, had I not have such a huge stake in OKP (largely illiquid stock), and the 20+% upward price revision by TTJ (although it was a ridiculously low ball offer, and felt more like a loss than a gain). 

What was responsible? In short, China. Bulk of the poor performance could be attributed to 4 stocks. Alibaba, Central China Management, Central China Ltd and Didi Global.

After divesting my stake in Perfect Shape (now called Perfect Medical) for a handsome gain, I was looking to put the funds to use. Now... success is a very bad teacher. I was laxed in my valuation.

Purchases in Alibaba started in Aug 2021, at the price of 160-ish HKD. We knew the price fell to 72 HKD. Through my persistent (and foolish?) buying as price fall day after day, my average price is now 115 HKD. I had to endure a 30% paper loss for most part, and reflect on why I had not insist on a larger margin of safety. Alibaba has since regain ground but appears to be selling off again for the last two trading days.

Central China Management (9982) and Central China Real Estate had a far, far worse fate. CCMGT was purchased from 1.77 HKD. Today it is only worth 0.88 HKD. Purchases for CCRE started at 1.17 and today it is worth half... at 0.58. Both of these are large positions. At present prices, it makes up for 13.7% of the entire portfolio (in terms of value). But on a cost basis, it is actually about 19%.

The case with Didi Global has been mentioned before so I shall not repeat it here.

With the exception of Central China RE (which I sold my parents' stake and reimburse them for the loss out of my own pocket, I do not wish for them to be exposed to this risk), I had not sell a single share for the rest of the counters. Unlike the sold down experienced by tech stock holders, these companies mentioned did not enjoy the post-COVID boom since 2020, and have contribute nothing but losses to my net worth. More frustratingly, none of them were bought during "good times." 

China is also responsible for another holding of mine-- YZJ Finance Holdings. Over a span of two months, it managed to make a 20% gain, only for it to crumble again amidst China's debt issues again. The position is now in red.

Overall, there were no mercy from the markets in 22-H1... and it had been a year of continuous bad news. 

Various positions in American exchange did not do well and all of them, except for the arbitrage position in Activision, is in loss of around 10-15%.

TTJ-- The end of the road.

When the offer was announced, efforts were made by investors, regretfully mostly individually, to push the owner for a better offer. IMO I do not think the shame and expose method is a great approach, but looking back, I do have my doubts that a gentler approach would help . 

However, I wish I had at least tried. I wished I had at least given Samarang Asset a call. I wished I had deliver the letter directly to TTJ to prod the owner to do the noble thing. I wished I had done more..

The most regretful part of the story is that some of the major shareholders prefer to adopt a wait and see attitude at the early stages. Moving early, banding up, and getting the message clear to everyone is the key. With no leadership, and no unified voice, each and every investor is trapped into their own little cells, i.e. a prisoners' dilemma, most will be inclined in a way that doesn't benefit them.

The longer the inaction, the greater the number of investors that would tender.

Risk arbitrages pretty much succeed most of the time, as long as there is 20-30% increase over the last traded price. Whether there is a 20-30% gain over the value, that is the matter, since everyone's idea of value differs. 

A decent increase over the last traded price typically works well for the acquirer, because
a) most market participants are not long term share holders. If they were, their annualized returns would have been low to normal due to lengthy time that share prices are depressed.

b) most buyers, post announcements, are risk arbitrageurs. They are motivated to close the deal as soon as possible (the sooner the deal closes, the better their returns look, annualized). 

c) Sellers are motivated to sell because no one wants to be a minority shareholder of a company where the owner has clearly and blatantly taken advantage of shareholders. Should the deal be off, there is really too many ways where the value a company can be suppressed through legal means. It is even more likely so for an illiquid company like TTJ

d) Shareholding structure is fragmented and in most parts of Asia, particularly Singapore, majority shareholding is concentrated in the hands of a few, making activism extremely difficult.

e) weak regulatory body/laws.

***

With the offer all but compulsory, I had no choice to tender and went looking for those forms. Earlier on, I told my fellow investors, who are considering to tender after THC had refused to increase the offer price, that I am still thinking it through. 

.... since I have discarded the forms right from the beginning, I realize that subconsciously, right from the beginning, I have never wanted to sell out...

Luckily, a fellow investor alert me that it is possible to approve digitally. 

 I try to live a life where one should do the right thing without considering if it is beneficial, but I am finding myself increasingly alone. Why is it that nobody cares about reputation anymore... which is something... even money could not buy?

This chapter had left me terribly bitter and deflated, and this is further compound by my portfolio's performance in recent months.

These are very dark days. Now all I could wish is that my mother's impending check up- would turn out fine..

June 2022 Portfolio Update

As of 19-June-2022:

S&P 500 Index Fund: -14.49% -> -19.97%

Hong Kong Tracker Fund: -14.91% -> -6.18%

Straits Times Index Fund: 3.02% -> 0.53%

My portfolio: -11.64% -> -2.63%

The rout in America continues, touching 20% before recovering briefly last Friday. Tech stocks has far too much weightage in the S&P. It was quite publicised that a handful of them are responsible for S&P 500's performance in 2021 (which I would remind everyone, it was 31.2%!).

The Hong Kong market has regain a fair amount of  losses since last month, more than 8%. Given that my portfolio is evenly split between the Singapore and Hong Kong, my portfolio recovered by almost the same margin as well.

Performance is primarily supported by the TTJ's tender offer and Alibaba's rally of almost 20%.

Transactions:

a) Complete divestment of Carpenter Tan
In view of number of resignations from the board, I decided to liquidate the stock based on gut feelings. With the title of CEO returning to the founder, it is likely that growth will stall in time to come.

I note that inventory turnover has dipped somewhat, but it wasn't the deal breaker.

I took a small loss for the position and it is deeply disappointing as this was held for almost 4 years.

b) Initial and top of positions in Warner Brothers Discovery; Increase in Activision Blizzard
In view of the number of insider buying and due to personal reasons which I cannot disclose, I have bought a modest number of stock. Unfortunately, I could not reveal more.

c) Modest increase in CCRE
The timing was unusually good, although briefly, as prices shot up due to the local government taking a slice of the founder's stake at a convertible bond price of 1.2x, and a reasonable interest rate of almost 6%.
Price of CCRE has fallen back ex-dividend, so there isn't really anything to cheer about.

Commentary

The slump in cryptocurrency prices were pretty shocking, and as much as I hate to say this, it has a "this time it feels different" feel to it.

There are a few reasons why I think this way.

Despite the decentralized nature of the asset itself, exchanges are halting withdrawals slowly, and this would at least have a short term (days) effect on the market, since the idea of "not your wallet, not your tokens" would drive some to liquidate and observe at the sidelines.

The second reason is the layoffs in many crypto exchanges, or at least suspension in hiring. I know Binance said that they are hiring, but I do not think they are trustworthy.

Lastly, there could be massive forced liquidation by funds, judging by the break of support prices in Bitcoin. 

So I think it is largely a matter of trust and falling dominos. I take a very neutral stand on cryptocurrencies after the Ukraine war. Given how difficult it is to value these assets, I give them a skip.

This is a pretty mute month, that is it for now.

-boonsong

TTJ: Voluntary Conditional Offer

Objective

This post attempts to fulfill two objectives. First, it seeks to demonstrate that the value in TTJ ("company"), even when conservatively considered, is leaps and bounds higher than the conditional cash offer. The exercise does not involve by plainly looking at the Net Asset Value stated in their books, but a practical and simple way of assessing things.

The second, is how I felt about the whole situation, what one should realistically expect as a shareholder, and what I had learnt from this episode.

Back of the envelope valuation of TTJ

As we go along, keep in mind, the offer from THC Ventures is 0.23$ a share, or a total consideration (for 349.5m shares), 80.385m.

The value of TTJ are primary in 3 areas, liquid assets, properties, and the structural steel business.

Liquid Assets

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)

The first step is to consider the more liquid assets of the company, namely cash, receivables and contract assets. Then, we proceed to apply a discount to each asset according. In case of cash, there is zero need to discount it-- after all, cash is cash. As for receivables ($ owe to the company by customers), 15% is applied in case of counterparty risk. (Do take note: no discount is applied to any liabilities, include account payables.)

But what are contract assets? According to the latest annual report in 2021, it states:

"The contract assets are for entity’s rights to consideration for work completed but not billed at the reporting date on the contracts; 

costs incurred to obtain or fulfil a contract with a customer; costs to obtain contracts with customers; 

pre-contract costs and setup costs; 

and the amount of amortisation and any impairment losses recognised in the reporting year. 

The contract assets are transferred to the receivables when the rights become unconditional. 

The contract liabilities primarily relate to the advance consideration received from customers. The entity recognises revenue for each respective performance obligation when control of the product or service transfers to the customer  "

Since there is a fair amount of judgement needed, a 20% discount to the value stated is reasonable.

The sum of these assets, discounted, is 77.452m

Properties

TTJ has property (both leasehold and freehold), that are either in the books, or disposed. For asset not sold, the acquisition cost price of the asset would be used. After all, if the price is not reasonable, why did management purchase it?

We will omit the property at 57 Pioneer Road as there is only 2 years left on lease, although I recognize that there is definitely value in it, and hence left out in this exercise.

1) Disposed factory at Johor Bahru
valued at 13.377m SGD

Source: https://links.sgx.com/FileOpen/T%20T%20J%20-%20Disposal%20of%20Assets.ashx?App=Announcement&FileID=670523

2) Factory in Chachoengsao District, the Kingdom of Thailand

for the purpose of wood pellet business which is suspended.

Acquired at cost: 5.95m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_of_Assets_in_Thailand.pdf

3) Factory in 51 Shipyard Crescent

for the purpose of wood pellet business which is suspended.

Acquired at cost: 16.81m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_BFI_announcement.pdf

Total value: 36.137m

Structural Steel Business

Due to the cyclical nature of the business, it is more prudent to look at long term earnings of the company. Figures below are extracted from annual reports of each year, usually classified under Note 4 "Financial Information by Operating Segments."

Profit Before Tax for Structural Steel business

2009     15.891m

2010     6.244m

2011     12.818m

2012     14.042m

2013     9.297m

2014     14.630m

2015     5.152m

2016     19.562m

2017     9.894m

2018     9.898

2019     5.022m

2020     -3.526m

2021     10.952m

Average: 9.99m

Median: 9.89m

Applying a tax rate of 17%, it is 8.217m, and applying a conservative multiple of 7 times, the structural steel business is worth about 56m. Even at the worst year earnings of 5.022m (post tax: 4.17m), it is worth about 28m.

Take note that Mr Teo has always run his business prudently, outlasting many of its peers. It has an order book of 187m, which are projects that will run between this year till 2024. 

Summary

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)
Sales/Disposal/Acquisition of factories/offices
JB factory	13.37m (disposed)	13.37m
Thailand factory	5.95m (at cost)	5.95m
Singapore (51 Shipyard Cresc)	16.81m (at cost)	16.81m
Total Assets		113.582m
Total liabilities	26.695m	26.695m (no discount)
Value of TTJ (without accounting for structural steel business; and 57 Pioneer Road leasehold property)		86.887m or $0.248 per share
Estimation of Structural Steel Business		a) Based on worst year earnings: 28m b) Best on median year earnings: 56m
Value of TTJ with Structural Steel Business		a) Based on worst year earnings: 114.515m or $0.329 a share b) Based on median year earnings: 142.515m, or $0.409 a share
Stated Net Asset Value (from half yearly result, announced Mar 2022)		128.582m, or $0.3679 a share
Voluntary Conditional Cash Offer		80.385m, or $0.23 a share

My Opinion

A reasonable assessment of the company's value, even without considering the structural steel business, is at least modestly more than the offer.

Mr Teo has been widely thought of as shareholder friendly, honest and forth-coming. This move to buy out, using a company to circumvent takeover codes, is very surprising and disappointing. 

Surely he wouldn't want his company, in the many years to come, to be quoted as the reason why a certain Singapore Exchange rule was birthed, out of the need to patch a certain loophole? Reputation is priceless.

I would be very fair and say that as minority shareholders, it is not reasonable to expect 40 over cents (that is the value, in my head, for optimal price + premium for control. Your value might differ.). Firstly, Mr Teo could have carried on status quo for as long as he likes. Secondly, he assumed the risk and effort in building up the company. Sure, as a listed company, there is a a minimum amount of public shareholders required, and credit is easier to access as a listed entity. 

Meeting at middle ground is a far more balanced and fair approach to both shareholders and management, leaving both parties feeling that nothing is lost or taken away. I note that in the offer document, under note 2(e), that the offer is not fixed. So I am hopeful.

Lastly, as a note to myself, this episode reminded me that cigar butt investing is fraught with danger. Cheap companies (even with asset value modestly discounted), with low returns on equity, required countless injection of capital over the years, as the price keep falling.

When one pursues this approach, he or she will feel immense unease-- that prices will remain depressed for years, or worse, got acquired with an offer as unsatisfactory as this. I have success with this approach in the past, but this is not one of them. However, it is a very good lesson.

-as of writing, TTJ weighs 9.81% of the entire portfolio. I have been a shareholder since 2017.